Is India deliberately avoiding reforms?

Dec 1, 2011

In this issue:
» The latest step by central banks is not a lasting solution
» Marc Faber is bearish on China
» Tata Motors edges past Infosys and Reliance in R&D spending
» Brokerages may be wrong about the health of Indian banking
» ...and more!
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When asked to dispense advice about how to succeed in life, Warren Buffett is often found encouraging students to use all of their horsepower. Many people have 400 horsepower engines but end up using only 100 horsepower out of it. Thus, as per him, a person who has only 200 horsepower engine but gets the full output out of it is certainly a lot better off. While serving as an extremely useful advice on self development, this philosophy will not find itself out of place in the discussion of development prospects of a whole nation.

And this is exactly the concern that Jim O Neill, a Goldman Sachs old hand and the inventor of the term BRIC, has with respect to India. Neill is surprised that a country with such massive inherent growth advantages, a favourable demographic being one of them, is not able to pull up its socks in matters of agricultural productivity, education, technology, and reforms. In fact, he even went to the extent of saying that reforms like FDI is something that India is deliberately looking to avoid.

Those who've been observing the Indian economy for quite some time now may not find O'Neill's statements objectionable. True, we have managed to pull ourselves out of the rut known as the Hindu rate of growth. But in a country where hundreds of millions of people go to bed without eating two square meals a day, a lot still needs to be done. The chance though that big bang reforms will take place is not very encouraging. As long as there will be policymakers for whom winning the next elections round the corner assumes more importance than the long term interests of the nation, harbouring a great deal of hope about reforms may prove to be futile.

All is not lost though. India's biggest strength is its vibrant democracy and its federal institutions. And it is the existence of these bodies which ensures that voices of discontent and discrimination are not smothered but are debated upon. Thus, while the country would be giving out an impression of deliberately avoiding reforms, they will happen eventually and take us to an even higher growth path.

Do you think we are deliberately avoiding reforms? Share your Share your views with us or you can also comment on our Facebook page / Google+ page.

 Chart of the day
The downward spiral for India's GDP growth continues. As per reports, India's GDP growth came in at 6.9% during the second quarter of FY12. As today's chart of the day shows, this is the lowest level in quite some quarters, two years to be precise. What more, growth in key industries have hit their lows of the past six years. Indeed, as the finance minister observed, hard days lie ahead for the Indian economy.


After hogging the limelight for launching the world's cheapest car (Nano) as well as acquiring two luxury brands (Jaguar and Land Rover), Tata Motors has once again made the headlines. This time it is for being the top-ranked company for research and development (R&D) in India as per a list compiled by the European Commission. Tata Motors reached this position by racing past heavyweights such as Infosys and Reliance Industries. The fact that the strength of Jaguar Land Rover (JLR) relies a lot on technology and R&D could be one of the reasons why Tata Motors bagged the top rank.

Incidentally, healthy performance by JLR during the fiscal so far has bolstered the fortunes of Tata Motors, whose passenger vehicles are otherwise facing a lot of pressure in the domestic market. Also, given that the company has lost a bit of market share in India in the passenger vehicles space, it is evaluating making new product launches going forward and improving its dealer network so that this segment can put up a strong show in the years ahead.

If there is any sector that is likely to take the maximum hit of India's GDP growth coming to a 2 year low, it is banking. This sector, being a reflection of how the economic variables manoeuvre through global uncertainties, could bear the biggest brunt. Credit growth tapering off due to lower demand from retail and corporate customers is just one aspect of the slowdown. Rising risk of NPAs, pressure on margins and capital constraints could acutely hit the business of some of the less efficient banks. The ones in private sector are at least expected to shield themselves with higher fee incomes. But the ones that are dependent on the government for raising capital for lending may find growth elusive.

Having said that, we are not completely in agreement with the print media and brokerages that are betting big on several PSU banks going bankrupt. Without denying the near term risks to the sector's fortunes, we believe that there are several seasoned players in the sector that are likely to emerge unhurt through the economic downturn. Investing in them at bargain prices could be a very fruitful decision over the longer term.

Coming back to India's GDP growth performance, what does corporate India have to say about this? According to Chandrajit Banerjee the director-general of the Confederation of Indian Industry (CII), India Inc is very concerned about the current growth path. High borrowing costs and a contraction in investments are likely to take its toll going forward as well. Plus, policy makers aren't taking enough strides to address these issues. Logjams in the Parliament and a lack of strong policy action are the biggest hurdles for India. Rather than running ahead, India seems to be stepping over its own feet too often.

Recently, the central banks of some developed countries like the US, Canada, Japan, Switzerland, Britain and the European Central Bank (ECB) have agreed to lower the cost of existing dollar swap lines by 50 basis points. Sounds Greek? Well, we don't want to confuse you more by getting into the nitty-gritty of the matter. The important point here is that this will make it easier and cheaper for the troubled European banks to make dollar loans. So far, they were finding it expensive to do this and had little choice but to sell euros. This in turn hammered the value of the euro and also restricted credit in Europe. And now, this new development will make dollars easily accessible to European banks. The central banks seem to think that this measure will prevent a credit crunch from striking the global economy.

But will this solve the European debt crisis? Not at all. The problem with central banks across the globe is that they have been trying in vain to solve a problem of excess leverage by more leverage. But homoeopathy doesn't work in the world of economics. By infusing more liquidity into the system, one can only expect to delay and worsen a looming crisis and fuel inflation. There is not going to be any real solution for the Eurozone economies without some painful touch reforms. And that calls for a lot of political will which seems to be totally lacking.

In 2008, when the world was sinking into recession, the emerging economies helped pull them out of it. The Chinese dragon roared and soared above all others. But the big question is that can the nation repeat its past performance? Legendary investor Marc Faber does not think so. In his opinion, the Chinese bubble has reached the end of its life cycle. And it would burst soon. The bubble defined by the excessive growth as well as the artificially low interest rates in the country, is nearing its end. Runaway property prices and inflation have forced the dragon nation to increase interest rates. This has led to slower growth in manufacturing. To add to this, there is a slowdown in the demand for commodities from the developed European nations. This would lead to further decline in demand and subsequently in manufacturing from China. As a result, the country would witness a downward spiral in growth. It would be up to the government to define how sharp the spiral would be. If they print more money, like their developed counterparts, the spiral may be slower. If not, then China would tumble down.

Meanwhile, in line with global indices, the Indian stock markets too experienced a strong buying momentum today with the Sensex trading higher by around 460 points at the time of writing. Heavyweights like ICICI Bank and Reliance were seen driving a good portion of the gains. Most Asian indices closed strong today and Europe too is trading in the positive currently.

 Today's investing mantra
"You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing." - Warren Buffett

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12 Responses to "Is India deliberately avoiding reforms?"

Naxita Merchant

Dec 10, 2011

If you call giving 51% FDI is growth than better we remain backward. And focus more on providing food education and health basic facility to the mass.

As far as politicans of this era are concern they have never though of country's growth with the face of human, otherwise why india corp. that sounds more like east india company who has ruled(looted) india and indians for 100 years.
we are happy with out FDI and Politicians of today.



Dec 3, 2011

I completely accept with SUJIT BANERJEE and gunjan views on the issue.
Moreover the points conveyed by the people said by the world class investors can't accepted to Indian scenario.
" Walmart's extreme pricing pressure on supplies forces those companies to relocate factories and jobs overseas"
Los Angeles Times 23 November 2003

The policy would most definitely disrupt the current balance of economy and will render millions of small retailers jobless by closing the small slit opportunity available to them.
Government instead complaining and commenting on the middlemen it should frame rules and regulations from which the producer can get more share from the consumer and also the prices can the kept under control.



Dec 2, 2011

Far from being a vibrant democracy, India at best is a pseudo-democracy. It provides an illusion of democracy with no real benefits to its citizens. Furthermore, its politicians are the biggest roadblocks to its progress. Remember, the opposite of Pro is Con. Ergo, the opposite of progress is congress.


gaura jhanwar

Dec 2, 2011

in the FDI -it is not a matter of politics. govt. should think about small shop owners not only in kirana sector but also for long term advantage and disadvantages what PM manmohan will do when they are at a same position of a grocery shop owner in indian shop owner can not compete big elephants of retail in each area finance logistics technology stock prices negotiatios with suppliers consumers
it seems govt decision system is lost its values,nationality of thnking capacity


deepak sheth

Dec 1, 2011

assuming india is not avoiding reforms, a stich in time saves nine and justice delayed is justise denied so however laudable are our democratic processes and standards we deny a timely cure and agood future to ourselves because of the partisan politics and highly varied interests of 120 crores population. world is changing but our mindset is not



Dec 1, 2011

The Congress like the NCP, Trinamool, SP , DMK and Mayawati is a family party : only a particular womb , pre-selected will produce the leader . So if the leader is a dunce as is the case with ALL the dynasts from Motilala to Pawar and Mamata and Kanimori then we are saddled with these jokers . Right way is to vote for the BJP or CPM , BUT and that is a BIG but , one is Bania ( Gujju/Marwadi protection party) , the other is a Bengali/Keralite pretender party taking orders from China ! So vote for nobody ! If you see an MP or IAS officer do what Goebbels said he would do to culture !



Dec 1, 2011

There is no empirical evidence anywhere in the world that foreign investments in organized retail benefit the local economy. Economic opinions are bitterly divided. Moreover, the rebalancing of employment will tilt more towards affluent classes at the expense of those who are at the margin. Also, foreign organized retailers will sooner or later lobby to waive local sourcing requirements and dump all the cheap goods in India. And why would farmers benefit? As buying power of purchasers consolidated, wouldn't producers be left at the mercy of God? World over, farmers hate organized retailers who push producers for every paisa.

Long live Indian politicians and long live those Indians who feel everything that happens in America is good!!!



Dec 1, 2011

It is clear that FDI in retail is looked at by the parties in opposition as an opportunity to pulldown the goverment for economic failures.All these parties had practiced differently whenever they were in power.Reuction in the number of political parties at the national level is the solution for taking bold policy decisions at the national level.



Dec 1, 2011




Dec 1, 2011

Equity Master,

I am an Indian citizen aged 50+ by proffession not an Economist( understand Economics of managing family expences unlike US citizen - now under debt.) but Chief Engineer in Merchant Navy travelling the world since past 30 years , seen Capitalist & Communists countries have personally came across people of those countries of 6 continents Rich and Poor - is aware of the market price since 1967 when I was a student of class VII .

Recently on FDI issue I read a publication from TOI stating what Govt.says ,what Oppositins are saying & and what TOI is saying also went through many comments from my learned/ knowledgeable citizens mostly against and few in favour .

What I understand from all these arguments

a) Middlemen are the most benificiery of the existing system by hoarding and artificially manipulating prices, producers are badly effected and also the consumers by not having quality goods at Cheap price .

b) Entry of WalMart at China has other reason as WalMart is largest buyer of China made product.So in China it generates employment as well products are made in China will automatically be Cheap . Of all the products that are sold through WalMart what are the % of products that are made in USA or Europe ? Would be happy to know the figure from EquityMaster .

c) Listening about investment in Infrastructure - are they going to build roads and maintain to produce/ manufacture their products at distant places and transport from one region to the other region?

d) Indian business houses who are doing business Relience Fresh , More of Aditya Birla Group, Big Bazar - have set an example of giving stuff's at cheaper prices and of good quality ?

e) What is preventing Govt. from arresting & punishing these middlemen who are one of the main reason of price rise ?

f) Why is it the perception that WalMart can bring all changes and benifit for Indian people? Why not Indian companies do the same job what WalMart can do? Is their any Derth of Competent people in India ?

g) What Gaurantee/Control Govt. will have on these Giants with their Govt.backing if they sell spurious stuff that will result in massive Health Detoriaration altogether ? As few years back we came to know how pseticides are used in soft drinks like Coke/Pepsi?

I hardly see any Indian made products selling abroad - I felt proud to see Tata Trucks & Buses plying in Kuwait in 1981, a SonoDyne Music system selling in middle-east electronic stores , that also may be because of many Indian shop keepers love for the country. Recently saw TITAN watches in Vietnam .

Why not by Indians for Indians ? TATA's has today owened Land Rover & Jaguar of UK . Did TATA's started their business in UK or was it from INDIA and with Indian people ?

Will Look Forward for Reply from Equity Master .


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